Three Lebanese banks L-T ratings placed on watch negative following sovereign watch placement

At the same time, the 'C' short-term counterparty credit ratings on Bank Audi SAL - Audi Saradar Group and Bankmed were affirmed.

The rating actions follow yesterday's placement of the long-term ratings on the Republic of Lebanon (B-/Watch Neg/C) on CreditWatch with negative implications (for more information, please see "Lebanon 'B-' LT Sovereign Credit Rating Placed On Watch Neg," published yesterday on RatingsDirect, Standard & Poor's Web-based credit analysis system).

"The ratings on all three banks reflect: the high risks inherent in operating in Lebanon that are a result of the country's macroeconomic problems, notably the government's high indebtedness, fiscal deficit and fragile political stability," said Standard & Poor's credit analyst Anouar Hassoune.

The placement of the sovereign on CreditWatch with negative implications reflects the escalating violence in the Middle East; this will create strains in the Lebanese government's coalition, depress the economy, and complicate economic policymaking.

Lebanese banks have high direct exposure to the sovereign. As the banks have a relatively low proportion of loans to total assets, they channel their surplus liquidity into government securities. At Sept. 30, 2005, Lebanese banks' direct exposure to the sovereign (including deposits at the central bank) was 54.9 trillion Lebanese pounds ($36.5 billion, at L£1504 to $1), about 7.0x equity base or 50% of assets. This ties the banks' fortunes to those of the Republic. In addition, Lebanese banks have increasingly been major investors in the U.S dollar-denominated notes and therefore highly exposed to any sovereign default.

"We still view the rated banks' good commercial profile and strong liquidity profiles in a favorable manner," said Standard & Poor's credit analyst Matthew Pirnie. "This is reflected in the high surplus liquidity derived from a wide deposit base of middle-to-high-income domestic and international customers. Nevertheless, the majority of these funds have been used to finance the government's deficit," he added.